Working Paper: NBER ID: w1152
Authors: Alan J. Auerbach
Abstract: Under current U.S. tax law, a distinction is made between gains and losses by businesses. Losses that must be "carried forward" are subject to two penalties: a loss of interest, and expiration after fifteen years. Previous examinations have focused on the higher expected tax payments such a tax system without "full loss offset" imposes on risky projects.This paper presents a dynamic analysis of the impact of taxation on investment when gains and losses are treated asymmetrically. The results provide a basis for analyzing recent tax changes, particularly the controversial"safe-harbor leasing" provisions of the 1981 tax legislation.
Keywords: Tax Law; Investment; Dynamic Effects; Asymmetries
JEL Codes: H25; H32
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| tax law asymmetries (K34) | investment decisions (G11) |
| loss carryforwards (G32) | investment behavior (G11) |
| higher probability of loss (G33) | lower likelihood to invest (G11) |
| tax law asymmetries (K34) | risk-taking in investment decisions (G11) |
| expectation of future tax benefits (H20) | current investment behavior (G31) |